How to Qualify for a Small Business Loan in 5 Steps
Knowing exactly what is required to apply for a small business loan with a lender can propel you on the right path to being successful in your business. So, what do you do to qualify for a small business loan?
Getting approved for a small business loan can be tedious and frustrating if you do not know how to meet the lender’s requirements. Some of the key steps you should take note of include building personal and business credit scores, developing a strong business plan, putting together necessary legal and financial documents, and more.
Consider these five steps to qualify for a small business loan
1. Find out the minimum qualification and requirement of the lender
There are certain minimum criteria regarding annual revenue, credit scores, and business record that will be expected for you to qualify for a business loan. But then, you may be lucky with some lenders who find out you overperform in a certain area but underperform in another area.
The type of business loan you are looking out for can also determine the required qualification for the loan. For instance, for you to qualify for loans that have the backing of the U.S Small Business Administration, your business has to meet the SBA’s specifications for an ideal small business, a profit-making venture, and cannot be an ineligible business, like financial organizations such as banks and life insurance companies.
It is also crucial that you are current with no past defaults on all government loans. For instance, if you have defaulted or late on a government mortgage or on a federal student loan, you’ll very likely be disqualified.
Traditional banks and online lenders characteristically underwrite qualified loans based on multiple traditional factors, but the requirements put forward by online lenders are often not as strict as traditional banks.
For instance, a business that hasn’t been functional for quite a while or someone who has had bad credit business loans may still be qualified for loans with online lenders. It’s only that this qualification may attract a more expensive loan.
2. Build business and personal credit scores
Your personal credit score would be required to qualify for a small business loan with a small business lender. This helps the lenders see your attitude towards debts.
Personal credit scores provide information on how able you are to repay personal debts such as auto loans, mortgages, and credit cards.
You can efficiently boost your personal credit include timely and total payment of personal bills. Building your business credit, you should keep your public records clean and also create trade lines. Several established organizations will have business credit scores that typically range from between 0 or 1 to 100.
And for a bank small business loan or a government-backed SBA loan, you’ll need good personal credit and excellent business credit to become eligible. But online lenders are not likely to be very strict with your credit scores – with a focus on track record and business cash flow.
3. Create a good business plan
All potential lenders will be willing to know how you intend to use the money you are applying for to see that you can actually repay after being approved. A strong business plan is expected to provide all the details on how the loan will be used and the projection on profit-making. Some cogent highlights that should be available in your business plan include a company description, management team, product and service description, promotional, marketing and sales strategy, industry analysis, current and projected financials, SWOT analysis (strengths, weaknesses, threats, and opportunities), facilities and operations plan.
Your business plan should reveal that there would be sufficient cash flow available to your business to cover expenses and repayment of the new loan. This provision will give your business more credibility with the prospective lender and thereby increase your chances to qualify for a small business loan.
4. Curate required financial and legal documents
Traditional lenders often require a wide range of documents during the process of applying for a loan. Some of the necessary legal and financial documents that would be needed for your loan applications include personal and business bank statements, a photo of your driver’s license, income statement and balance sheet, business licenses, business, and personal income tax returns, articles of incorporation, commercial leases, a resume disclosing your business experience and relevant management, and in the case of a limited operating history, you should provide your financial projections.
When applying for a small business loan, it is vital to compare your options to uncover the lowest-cost loan that meets the expectations of your business. Online lenders aren’t likely going to offer you huge documentation. You’ll receive quicker underwriting with a streamlined application process.
5. Provide collateral
Collateral may be a crucial requirement to get a loan to finance your small business. Collaterals are assets such as inventories, equipment, or real estate which can be liquidated to repay your business loan in the case of defaults in loan repayment. Lenders generally use this medium to recover their money if an applicant’s business fails.
For SBA 7 (a) loans above $25,000 require collateral and a personal guarantee from every owner of 20% or more of the business.
But then, some online lenders do not request for collateral but may ask for a personal guarantee. Some may take a blanket lien on your business assets, which can be regarded as another form of collateral – and offers the lender the right to claim business assets such as equipment, real estate, and inventory to recoup a defaulted loan.
However, it is always important to check the requirements with each lender as each lender has rules that differ from another. And if you can’t risk losing a business or personal asset provided as collateral for a loan, or do not have collateral to get a loan, then you may want to consider unsecured business loans.